Blockchain: A Primer for Governments

In the 1980s, the Internet began radically changing the world. However, it took time to grasp the magnitude of this revolution—first technologists, then businesses, then the public, and then governments.

In 2008, two months after the collapse of Lehman Brothers and widespread disintegration of trust in centralized financial institutions, blockchain was born.

Many describe blockchain as the biggest technological innovation since the Internet, and the revolution is already unfolding.

The question for the public sector now is, how are they going to learn from the advent of the Internet and e-commerce, and apply these lessons to revolutionary technologies like blockchain?

The first step is to look up and pay attention.

What is blockchain?

Before we understand blockchain, we must first understand its relation to digital ledgers.

A ledger is a record of transactions. Like any simple accounting ledger, it records what comes in and what goes out. In the hundreds of years that we’ve relied on ledgers, the underlying idea has changed very little, except that they are now digitized.

Yet ledgers—in essence, digital records—remain at the heart of governance, commerce, and any widespread, collaborative effort. With the rise of globalization and big data, ledgers have only become increasingly important—and problematic.

The biggest problem with standard ledgers is trust. How do can you verify the accuracy of the ledger? Of the people or organization responsible for maintaining it?

Blockchain is revolutionary, because it addresses this problem of trust.

Blockchain allows for a public, secure, authenticated ledger of any digital asset. It decentralizes data from the few to the many, removing the need for an intermediary, like a bank, to maintain the ledger.

Unlike traditional centralized ledgers, which are controlled by one entity, blockchain ledgers can be decentralized (publicly accessible) or distributed (shared access by ‘trusted’ parties).

Traditional ledgers are centralized, meaning one entity controls the data. Blockchain ledgers can be either completely decentralized (public can add data) or distributed (groups can add data).

At the heart of the technology is cryptology—using math to store and transmit data securely. Transmitting data cryptographically ensures that:

1) only the intended parties can view the data

2) the data cannot be altered without detection

3) relevant parties cannot deny their intention in sending or receiving the data

4) relevant parties can confirm each other’s identities and the origin and destination of the data

Blockchain itself is literally a ‘block’ of records uploaded to a digital database that uses cryptography to “chain” the data to the next block, and therefore the rest of the ledger.

Through this cryptographic process, blocks of data are authenticated by group consensus among whoever has been given access to the ledger.

The result is a virtually tamper-proof database being synchronized in almost real-time.

Blockchain is most famously known as the technology underlying the global digital currency bitcoin. Bitcoin is an application that uses blockchain, like email uses the Internet.

Blocks of transaction data being added to the bitcoin ledger.

PayPal is a centralized payment network that unilaterally controls its ledger. We trust the ledger because of the brand and history established by the company.

Bitcoin is a decentralized payment network that we trust because of blockchain. Anyone can access the database, and at any one time there are over 6,000 computers updating the bitcoin ledger. All of these computers are simultaneously trying to solve a math problem, and once one computer solves the problem, it shares the answer across the network. If more than 50 percent of computers agree, the ‘block’ of transactions is added to the chain.

The algorithms undergirding blockchain make it a virtually hack-proof, permanent record. No one can change the ledger without a majority consensus of all computers on the network.

There are many different ways to set up these ledgers—the two most important factors being who can see the information and who can update it.

The bitcoin database is an “unpermissioned ledger”, which means it cannot be owned by any single person or organization. Anyone can potentially contribute to, access, or authenticate the database, and everyone has identical copies of the ledger.

Blockchain ledgers can also be “permissioned”, meaning they have one or more owners, and are not necessarily public. In this case, the blocks of data are authenticated by designated ‘trusted’ groups (e.g. banks or government departments), where everyone with access to the database can see the digital signatures of all other parties.

A “distributed ledger” is like an unpermissioned ledger in that anyone has access to the data, however only a designated group (usually widely dispersed to maintain trust) is entrusted with adding new records. One such example is Ripple, a global financial database public to anyone but only updated by selected financial institutions.

Proof of concept

In 2009, a Norwegian man bought the equivalent of $27 worth of bitcoin. He forgot about them only to find out four years later that they were worth $886,000.

At present, one bitcoin equals more than 1,000 USD, by far the most valuable currency in the world. This meteoric rise in value is a testament to the value of blockchain technology. Since its inception in 2009, the bitcoin ledger itself has never been hacked.

This level of security, scalability, and transparency is unparalleled.

And the uses of the technology are endless. Here are some of the ways it’s already being put to use:

Marketplaces.Ujo Music and Open Bazaar are online marketplaces that facilitate direct peer-to-peer transactions, removing the need for a middleman like Etsy or iTunes. Musicians using Ujo Music, for example, can sell music directly to their listeners. The Australian Stock Exchange (ASX) plans to completely replace their legacy software with blockchain technology.

Chain of supply. Blockchain technology can help authenticate the supply chain for products in special danger of tampering, like diamonds and pharmaceuticals. Using a distributer ledger, buyers can see and authenticate each step of the product’s journey, significantly reducing risk of things like counterfeit drugs and blood diamonds.

Smart contracts. What’s truly novel about blockchain is that you can build the rules of the database directly into the transaction, to be automatically executed. Therefore, one of the most useful applications of blockchain is smart contracts, which automatically enforce contract conditions through software code. This will drastically lower the cost of enforcing contracts and allow virtual strangers to engage in contracts with a high level of trust.

Why does this matter for the public sector?

In a 2016 speech addressing the potential of blockchain for government use, UK Minister of Cabinet Office Matt Hancock said this:

“Blockchains – distributed ledgers, shared ledgers – are digital tools for building trust in data…government cannot bury its head in the sand and ignore new technologies as they emerge…The problem in 2010 was that the internet had, in the preceding years, become part of the fabric of the nation, but it was not part of the fabric of government. [Blockchain is] about changing the business model. Not just about doing the old things in new ways, but changing how we deliver for our customers: the citizens of this country.”

Technology-aware governments like the UK are leading the charge on researching the potential benefits and concerns of integrating blockchain into the public sector. They have learned enough from the transition to the Internet age to proactively pursue this technology, and governments around the world will benefit from their research.

The potential uses of blockchain in the public sector are numerous and transformative.

• Reduced cost of operations, including reducing fraud and error in payments

• Greater transparency of transactions between government agencies and citizens

• Greater financial inclusion of people currently on the fringes of the financial system

• Reduced costs of protecting citizens’ data while creating the possibility to share data between different entities, allowing for the creation of information marketplaces

• Protection of critical infrastructure such as bridges, tunnels etc

• Reduced market friction, making it easier for small and medium-sized enterprises (SMEs) to interact with local and national authorities

• Promotion of innovation and economic growth possibilities for SMEs

More specifically, the technology could be applied to service areas such as collecting taxes, issuing benefits, issuing passports, recording land registries, and ensuring integrity of government records and services.

Estonia, for example, has successfully employed blockchain through the use of Keyless Signature Identifiers (KSIs) for many years. This has allowed them to dramatically expand e-government services, while maintaining a high level of efficiency and security.

However, governments are still approaching blockchain cautiously, as the technology is remains underdeveloped. Both software applications and regulatory bodies will have to address issues of privacy, security, identity, and trust before the technology can be widespread.

For now, governments should focus on understanding the technology and bringing it into the public discourse. Pooling resources among govtech leaders and private sector partners will mean faster development and application of the technology, as well as more open communication and information sharing.